1. Financial Intermediaries and the Banking System Chapter 4

2. Financial Intermediaries uSpecialized financial firms that facilitate the indirect transfer of funds from savers to borrowers by offering savings instruments and borrowing instruments

3. Financial Intermediation uThe process by which financial intermediaries transform funds provided by savers into funds used by borrowers

4. Benefits of Intermediaries uReduced costs uRisk/diversification uFunds divisibility/pooling uFinancial flexibility uRelated services

5. Types of Intermediaries uCommercial banks uCredit unions uThrift institutions uMutual funds uWhole life insurance companies uPension funds

6. Safety (Risk) of Financial Institutions uBanks, thrifts and credit unions F insured by FDIC F regulated by Federal Reserve uInsurance companies F regulated by states uPensions F ERISA established PBGC uMutual funds F SEC

7. Evolution of Banking Systems uStorage of valuables (gold & silver) uDepository receipts uReceipts could be traded uInventory could be lent out uOnly necessary to maintain enough reserves to cover demand for withdrawal (fractional reserves)

8. Fractional Reserve System uWhen the amount of reserves maintained by a financial institution to satisfy requests for withdrawals is less than 100 percent of total deposits

9. Excess Reserves uReserves at a bank in excess of the amount required uEqual to the total reserves minus the required reserves uAvailable for lending F an increase in reserves increases the money supply

10. Money Supply uMaximum change in the money supply equals the excess reserves divided by the reserve requirement

11. U. S. Banking System uDual banking system F bank chartering exists both at state and national levels uIntrastate branching F establishing branch banks within the same state uInterstate branching F establishing branch banks in more than one state

12. Bank Holding Company uCorporation that owns controlling interest in one or more banks

13. Central Banking - The Federal Reserve System uManages the monetary policy of the country uDecentralized network of regional, district banks uSupervised by the Board of Governors, appointed by the President

14. uMonetary Policy F influence economic conditions (interest rates) by managing the nations money supply Responsibilities of the Fed

15. Monetary Policy uOpen Market Operations F buy and sell Treasury securities to expand or contract the nation’s money supply v Primary Dealer –has established relationship with the Federal Reserve to buy and sell government securities

16. Monetary Policy uReserve requirements uDiscount rate F charged by the Fed for loans it makes to banks to meet temporary shortages in required reserves

17. Responsibilities of the Fed (continued) uMonetary Policy uRegulate and supervise financial institutions operating in the United States uCheck clearing operations provided by its payment system

18. U. S. Banking Trends uDeregulation uLarge financial service corporations uOverlapping of products available

19. International Banking uOther countries have fewer financial institutions, but with more branches uForeign banks are allowed to engage in non-banking business activities uMost of the world’s largest banks are not U. S. banks uEdge Act uInternational Banking Facilities (IBFs)

20. End of Chapter 4 Financial Intermediaries and the Banking System